Adjunct Fellow Jon Entine

On the world's stock exchanges, mining is suddenly where the action is. Even as the markets gyrate lower, Rio Tinto, BHP Billiton, Vale, Freeport-McMoRan and the like are going gangbusters, as sleeping giant economies in China and India rouse towards developed world status.

Criticised for human rights and environmental indifference, basic materials industry executives believe they face a lose-lose predicament. From the perspective of non-governmental organisations, companies should not only be held accountable for operations, but they should also have to justify their fundamental right to extract resources--an issue off the table for the industry.

From the corporations' perspective, most NGOs have no clue what it's like to operate in dysfunctional geopolitical zones. They are chastised for being Big Brother, yet they are expected to be a literal big brother, compensating for real governments' inability to provide education, healthcare and security.

Corporate Carfuffle

That's what makes the recent brouhaha between the metals giant Freeport and the International Center for Corporate Accountability, an independent NGO, so dispiriting. The New Orleans-based mining group had been under attack for allegedly paying money to the military to quash citizen uprisings to keep its Indonesian Grasberg mine humming. In response, in 2004, Freeport commissioned an external review by Prakash Sethi, the Baruch (City University of New York) Business professor and president of the ICCA. It was a dramatic move in an industry hostile to outside scrutiny.

Some believe that sector peer Newmont Mining paid significantly for resisting outside alliances. In 2004, an Indonesian NGO accused Newmont of poisoning the waters at its Buyat Bay facility. Five officials were jailed. Newmont released laboratory tests contradicting the allegations, but to no avail in the court of public opinion, aka the New York Times, which ran a scathing article.

It took weeks before the World Health Organisation could run independent tests, rejecting the hysteria and verifying Newmont's studies. But the experience was brutal--and perhaps avoidable, some industry leaders said, if Newmont had worked more closely with NGOs that might have rallied to its defence.

It was during the same period that Freeport hired the ICCA. The company's role in Indonesia is complex, not unlike what many raw materials companies face in the developing world. From the moment engineers arrived in the 1960s, Freeport started building a new society from the ground up, acting as employer, government and nanny. No surprise the revolutionary cultural makeover left potholes.

Sethi's unvarnished report, published in 2005, identified most of them. The company responded by pouring resources into Grasberg and increasing medical care benefits. Sethi said: "I think after being in business for such a long time, the company has indeed become very sensitive to the human rights issue."

Fast-forward to last December and comity had deteriorated into enmity. In a follow-up audit, Sethi noted Freeport had "responded rapidly and effectively to most of the recommendations". But auditors found persistent problems in healthcare. They noted that 2 per cent of Freeport's were on short-term contracts with fewer benefits, which violated Indonesian law and company policy.

Angered, Freeport released an "executive summary," pledging to take ameliorative action but sidestepping some of the criticism. In turn, Sethi posted the audit on the ICCA website, noting: "Freeport has exaggerated its achievements and glossed over its lack of implementation."

Sethi then ended his contract with Freeport.

Chaos Rules

Carol Raulston, head of communications at the National Mining Association, believes Freeport faced a classic no-win situation for businesses operating in economically and politically chaotic zones.

"It's not like Europe or the US where there are strong regulations and government reporting procedures," Raulston says. "Working with NGOs put them in a vulnerable situation, and in this case they're taking a hit, but their transparency will be worth it down the road."

Multinational miners are gradually opening themselves to third party verification. Meanwhile, NGOs also put their brands on the line if they choose to work with companies they long considered the enemy of human rights and the environment.

Jon Entine is an adjunct fellow at AEI.